Many Regional Banks Are Thriving During Japan’s Slump

As a plunge in Japanese stock and property prices has squeezed earnings at major banks, many of Japan’s smaller prefectural lenders have emerged unscathed from the great crash in asset prices.

Dozens of regional lenders have reported earnings for the six months to September and, with the exception of a handful, they say they are seeing strong growth in profits.

Most of the unsung regional banks, who serve customers in prefectural capitals across Japan, stayed out of the competition among Japan’s 21 large commercial and trust banks to expand loan portfolios in the easy money days of the 1980s.

Today, many regional lenders are having the last laugh.

The Finance Ministry said Japan’s 21 major lenders had $100 billion in costly bad loans in their bloated loan portfolios at the end of the six months to September. In the same period, some regional banks are reporting record jumps in earnings growth.

Take for example, Aomori Bank, the leading lender for the Aomori Prefectural Government in north Japan, where apple orchards dominate the landscape. The bank said its pretax profits grew 18.55% to $28.3 million.

Aomori Bank director and general manager Michio Hirahide said operating profit, which represents profit from the bank’s core business of lending deposit funds to clients, grew by a record 250% in the six months to September.

“Profit margins are wide and getting wider,” Hirahide said at the Tokyo Stock Exchange. “We haven’t been hurt at all by the bursting of the economic bubble,” he said, referring to the decline in Japanese asset prices.

Not all regional banks are doing as well as Aomori. Some are struggling to remain profitable amid a decline in demand for new loans caused by Japan’s economic slowdown.

A few are in the same boat as Japan’s major lenders --paying the price now of investing heavily in stock and real estate in the boom years of the late 1980s.

But in general, regional banks have less bad debt as a portion of total outstanding loans than Japan’s major lenders, banking industry analysts said.

“In terms of loan quality, regional banks in general are a lot sounder,” said Linda Daquil, a banking industry analyst at UBS Phillips Drew Securities.